Shareholder Disputes

Shareholder disputes in New York can be sensitive and complex. They may involve an alleged breach of a fiduciary duty, a dispute over how much executives should be compensated, shareholder appraisal rights, minority shareholder rights, or a conflict over who should control the direction in which the business will go in the future. Disputes over these important matters have the potential to undermine a corporation if there is no mechanism in place for an efficient resolution. Sometimes a shareholder agreement is in place so that everyone who holds stocks understands their rights or obligations. In other cases, New York law governs the issue. At The Linden Law Group, P.C., our New York City shareholder litigation lawyers can provide knowledgeable legal representation in case of a dispute.

Often, shareholder disputes can be resolved by turning to a well-drafted shareholder agreement. When appropriately drafted, the agreement should address the rights and obligations of shareholders, both majority and minority. The majority shareholders will look at the issue of whether the right to transfer shares in a closely held corporation should be restricted. In closely held corporations, the people who founded the company may want to work only with each other, and they may not be interested in working with a spouse or another founder's children.

The shareholder agreement should spell out restrictions in case of death, disabling illness, divorce, retirement, termination for cause, and other contingencies. One way in which a written shareholder agreement might address those contingencies is by including a right of first refusal. This would expressly state that a particular shareholder is entitled to buy shares when someone proposes an unwelcome transfer.

In some cases, however, there is no shareholder agreement. Alternatively, the agreement may not provide a method by which a dispute should be resolved. The New York Business Corporation Law, as well as common law, will govern the dispute in that case. A shareholder litigation attorney in New York City can advise you on how the law may apply to your situation.

For example, shareholder lawsuits are often based on the right of shareholders to inspect the corporate books. Since shareholders are the owners of the corporation, they have an interest in looking at the state of their financial information. However, the law balances this interest with the need to separate ownership and management control. Inspection rights may be limited so that the corporation's board of directors can manage the corporation's affairs properly. In New York, shareholders have inspection rights under common law and under the Business Corporation Law.

In order to exercise a right of inspection, a demand must be made on the board of directors, asking for specific corporate books and records. The board is supposed to respond in a reasonable time frame. If the board denies the demand, the shareholder can ask for judicial relief with the assistance of a New York City shareholder litigation attorney.

To enforce the right of inspection in court, the shareholder seeking to enforce it will need to be a shareholder at the time of the request and will also need to have a good-faith and proper reason for making the request. Corporations are allowed to ask for proof of shareholder status before giving access. Common law in New York only permits the exercise of inspection rights when the requestor acts in good faith and with a proper purpose. In contrast, if the lawsuit is based on the assertion that the shareholder has a statutory right to inspect, the corporation has the burden of showing bad faith or an improper purpose.

Shareholder purposes that are considered proper include calculating the value of stock, investigating management's actions, obtaining information to assist with litigation, and determining the financial condition of the corporation. Improper purposes would include trying to discover business secrets to help a competitor, to get prospects for a personal reason, or to locate information that furthers the shareholder's social or political goals.

Another reason for a shareholder dispute might be a breach of fiduciary duty. In a closely held corporation, similar to a partnership, shareholders owe fiduciary duties to each other. This means that they are not supposed to steal corporate opportunities or engage in self-dealing, among other things. Majority shareholders owe a fiduciary duty to minority shareholders not to engage in oppressive actions. Under case law, oppressive actions are actions that, when viewed objectively, substantially defeat reasonable shareholder expectations that were central to a shareholder's decision to join a venture.

If you are concerned about a shareholder dispute, you should retain an experienced attorney to represent you. The Linden Law Group, P.C. represents businesses and their owners in Manhattan, Queens, the Bronx, Brooklyn, and Staten Island, as well as in Nassau and Suffolk Counties. Contact us at (212) 537-6612 or via our online form. Sue to get your money and damages back. We are also available to help you appeal an unfavorable judgment affecting your business or your rights as a shareholder if needed.